Fitch warns that impasse could threaten AAA credit of U.S.

One of Wall Street’s leading credit-rating firms Tuesday afternoon warned that it may downgrade the U.S. credit rating from AAA as a result of the congressional impasse that could force the Treasury Department to hit its borrowing limit on Thursday and could lead to a first-ever default on Treasury securities within days after that.

While both the House and the Senate were drafting bills that would extend borrowing authority through February, Democrats and Republicans remain at loggerheads over what other provisions to attach to the measure, with the House GOP continuing to hold out for major alterations in President Obama’s signature health care reform program.

In issuing a formal warming, Fitch Ratings noted that with such big outstanding differences, not enough time remains to ensure the Treasury will be able to continue paying the nation’s debts.

“The U.S. authorities have not raised the federal debt ceiling in a timely manner,” said Fitch Managing Director Ed Parker. “Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default.”

Fitch took little comfort in the fact that the Treasury Department on Thursday will still have some $30 billion in cash on hand and will still be getting some additional tax revenues each day, noting that the revenue and spending flows can be “volatile” from day to day, and it is “unclear” whether Treasury officials have the legal authority needed to put debt payments ahead of other government obligations such as Social Security, veterans benefits and Medicare payments.

In putting the U.S. rating under review for a downgrade, Fitch cited many of the same issues raised by Standard & Poor’s Corp. when it downgraded the U.S. to AA-plus after a similar debt impasse in Congress in August 2011.

Even if the Treasury Department withholds payment from some citizens so it can make debt payments, doing so “would damage the perception of U.S. sovereign creditworthiness and the economy” while diminishing American status and prestige in global financial markets, Mr. Parker said.

“The prolonged negotiations over raising the debt ceiling (following the episode in August 2011) risks undermining confidence in the role of the U.S. dollar as the pre-eminent global reserve currency, by casting doubt over the full faith and credit of the U.S.”

“The repeated brinkmanship over raising the debt ceiling dents confidence in the effectiveness of the U.S. government and political institutions, and in the coherence and credibility of economic policy,” he added.

Fitch’s warning came after Wall Street markets closed Tuesday. The Dow Jones industrial average already had declined 133 points to 15,168 as the impasse persisted, and other indexes were down nearly 1 percent.

Further declines appeared likely Wednesday as Dow futures plummeted by triple digits shortly after the Fitch announcement.